Biz Bits: 5 questions you need to ask about IRAs

Thursday

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Tip of the Week

Rob Fishbein, a vice president and corporate counsel in Prudential's Tax Department, answers these frequently asked questions about IRAs:

Q: Who is eligible to contribute?

A: The surprising answer for some people is that if you earn income and are younger than 70 1/2 you can contribute to a traditional IRA, regardless of income level and regardless of whether you or your spouse are covered by a work-sponsored retirement account - such as a 401(k) plan.

Q: How much can I contribute?

A: Most individuals have the option in 2010 and 2011 of contributing $5,000 to a traditional IRA, or $6,000 if you are age 50 or older, and enjoying tax deferred earnings. This is a powerful savings opportunity that should be used to the maximum extent possible.

Q: How can an IRA impact my tax liability?

A: People often confuse the eligibility rules with the deductibility rules. Whether you can deduct the contribution from income depends on whether you or your spouse are covered by a retirement plan at work. If neither of you are covered by a plan then you can take a deduction for an IRA contribution no matter what you earn. If both of you are covered by a plan, or if only the spouse making the IRA contribution is covered by a plan, then for 2010 you can still take a deduction if you make less than $89,000. But you lose eligibility to take a deduction if you jointly make $109,000 or more. In between those two numbers you can take a partial deduction. Similar rules with different income limits apply for single taxpayers or where the spouse making the contribution is not covered by a plan.

Q: Why should I make the maximum contribution each year?

A: Even if you are not eligible to deduct your contribution to a traditional IRA, the traditional IRA offers a way to grow your savings for retirement on a tax-deferred basis, since income earned is only subject to income tax when distributed. Second, you can convert the traditional IRA to a Roth IRA because the income limits that previously were in place for Roth conversions have been eliminated. This means that even if you make too much income to contribute to a Roth IRA directly, you can do so indirectly and enjoy tax-free earnings after the date of conversion.

Q: How can I get started?

A: The first call to make should be to your financial planner or tax adviser to review your personal circumstances and to make sure that starting or contributing to a traditional IRA makes sense for you.

- ARA

BBB Watch

The Better Business Bureau advises consumers to remember the following when making holiday returns:

- Save your receipts. Whether you are the giver or the receiver, be sure to save your receipts and you know the return time frame. Don't wait too long to return the item.

- Ask about restocking fees. Some merchants charge a restocking or "open box" fee for returns of electronics products or large-ticket items; ask if that is their policy. Restocking fees can be as high as 25 percent of the purchase.

- Do not assume the regular return policy applies to sales or clearance items. Some merchants consider sales items to be final, so ask to be sure. If you are the gift-recipient, do not assume you have the right to return or exchange an unwanted present. Like the shopper, you are bound by the merchant's return policy.

Check out businesses before making a purchase to review customer experiences at www.bbb.org.